San Francisco is using surplus of offices to fill apartment gap

Homes of dot-com failures become housing for people

January 26, 2003|By BLOOMBERG NEWS

SAN FRANCISCO - In a concrete tower on San Francisco's Market Street, where employees of such Internet companies as IXL Enterprises Inc. once toiled, developers are building the city's latest hot product: apartments.

Tishman Speyer Properties LP is converting the top half of the 40-story building at 575 Market to housing from offices left vacant in the dot-com bust. "Housing in San Francisco so far has been a very, very strong performer," said Ezra Mersey, Tishman's managing director. "We're confident it makes sense."

Developers that bought or built offices to capitalize on the 1990s Internet boom, when rents more than doubled in less than four years, are seeking refuge in housing.

San Francisco office rents have fallen 60 percent from a peak of $80.16 a square foot two years ago, more than any other U.S. city, said Cushman & Wakefield, a real estate brokerage. About 15 million square feet of space is vacant, equal to all the offices in Portland, Ore.

Equity Office Properties Trust, the largest U.S. office building owner, said this month that it ended a two-year venture to build San Francisco offices after investing $253 million only to have vacancies soar.

While costs to retrofit office buildings can limit the payoff on conversions, developers and brokers say the strategy is preferable to losing money on an empty building.

"These people are sitting with an asset saying, `What should I do about this?' " said Paul Zeger, president of Pacific Marketing Associates in San Francisco.

The transformation of offices into homes will help ease what the Federal Reserve Bank of San Francisco ranks as the nation's tightest housing market, analysts said. Only 14 percent of residents can afford the median home price, $568,000 in the city.